Stock Market & Crypto Currency Update – July 17th, 2023
Bottom Line: My first rule of money is to never let your money and emotions cross paths. The purpose of this story is to inform you as to what's possible in a near worst-case outcome for the financial markets. The reason is to understand what's possible, though unlikely, so you can plan soundly for your financial future unemotionally. The US stock market is the greatest wealth creation machine in the history of the world. Likewise, cryptos have created generational wealth for many who were early, however most investors in the crypto space have now lost money on their original investments. I want you to benefit from investing without making emotional mistakes with money. Historically, when investors attempt to time the market, they end up worse off than if they’d stayed with their original plan over 90% of the time. This is all about combating those types of mistakes.
Here's how far the Dow, S&P 500 & Nasdaq are from their record highs:
- DOW: -6% (+2% last week)
- S&P 500: -6% (+2% last week)
- Nasdaq: -12% (+3% last week)
The combination of taming inflation and a good start to the corporate earnings season paved the path for another week of impressive stock market gains restoring markets to levels not seen in about a year and a half. Not only was consumer inflation significantly lower than expected at 3% in June, but wholesale inflation was also nearly nonexistent during the month. A soft landing, one which would lead to an end of the extraordinary inflation cycle we’ve lived under for two years, is going from having been a highly unlikely scenario to being the base case with many big investors. There’s a long way to go before that or whatever happens will be known, however there’s at least a chance and markets are currently pricing that in – along with higher earnings. Whether or not an overall economic recession is in the cards, an earnings recession has fully been baked in the cake. Companies have been expected to report earnings indicating less money earned compared to a year ago. And even with an impressive start to the earnings season – that is what we’re seeing. Through Friday, with under 10% of companies reporting, 80% of companies have reported positive earnings surprises, and the average earnings beat has been by nearly 9%. Those are well above average results – though the average decline in earnings has been about 7% year-over-year. This will be a key earnings week. As for cryptos...
Bitcoin & digital currencies generally were flat to higher last week. Importantly from a psychological perspective bitcoin held the $30,000 threshold while Ethereum is back over $1,900. Meanwhile, the Bitwise ETF, which represents the top 10 cryptocurrencies, surged higher to close at highs not seen since last August. Questions about regulation remain. Will the federal government seek to compete with the current crypto players, or will they allow the digital currency space to evolve as it is? I can’t provide value analysis for cryptos currencies because they retain no inherent value, but I can for stocks because they do...
Here’s where the stock market stands based on fundamentals using the S&P 500 as benchmark.
- S&P 500 P\E: 26.08
- S&P 500 avg. PE: 16.02
The downside risk is 39% based on earnings multiples right now from current levels. That’s 2% more risk than a week ago as prices were higher with fundamentals mostly unchanged. It’s 18% less risk than the highs reached last year. If a short-term decline at those levels wouldn't affect your day-to-day life, you're likely well positioned. If that is a problem for you, you should probably seek professional assistance in crafting your plan that balances your short-term needs with longer term objectives.